December 6, 2008

In the Pool

Regulators favor patent pools to encourage innovation in industries where
overlapping patents and excessive litigation suppress innovation. With
patent pools, member firms share patents freely with each other and offer
one-stop licenses to outside firms. Thus patent pools are expected to
promote innovation by reducing litigation risks for pool members and
lowering transaction costs for outside firms. Our data confirm that pools
reduce litigation risks for members and that pool members patent more in the
years leading up to the pool. Pool members, however, patent less as soon as
the pool is established and only resume patenting after the pool dissolves.
Performance data suggest that innovation slowed as soon as the pool had been
established and resumed only after the pool had been dissolved.

Lampe and Moser have "the first patent pool in U.S. history, the Sewing
Machine Combination (1856-1877)" as their study centerpiece.

They describe an aircraft patent pool, formed upon Congressional
"recommendation", where the U.S. entered World War One three weeks after the
pool was formed. U.S. aircraft production soared from 83 in 1916 to
1,807 in 1917, and 11,950 in 1918. One would not logically attribute that to the
patent pool as much as historical circumstance.

Recently, patent pools for the SARS vaccines and HIV/AIDS drugs have arisen.

Theoretical models of patent pools predict that pools encourage
innovation. Specifically, the prospect of a patent pool increases firms'
incentives to invest in R&D because lower risks of litigation and improved
licensing schemes increase expected profits for participating firms. The
prospect of a patent pool may also increase the speed of innovation: If a
limited number of patents are needed to form the pool is limited, firms may
race to develop the technologies that are included.

A lack of contemporary data, however, has made it difficult to establish
these effects empirically.

So they look at the first U.S. patent pool, for sewing machines, in the
mid-1800s.

The case of the sewing machine industry suggests two ways in which pools
may discourage innovation, in the absence of regulation. First, by creating
a more formidable opponent in a court of laws, pools intensify the threat of
litigation for outside firms. Thus, 19th century litigation data show that
outside firms were more likely to act as a defendant in a court of law after
the pool had been established, and that pool members acted as plaintiffs in
most of these cases. Second, the existence of the pool appears to have
shifted the direction of innovation to an inferior technology, the
chain-stitch, which was known to be significantly less robust, and
unsuitable for mass production.

Though they focused on a single example, they were careful in their analysis,
attempting to account for anomalies, such as the Civil War during the time of
the sewing machine patent pool. Their solitary example well supports their
conclusions, which are logical, and thus convincing.

Our data confirm the predictions of previous literature that patent pools
lower the risks of litigation for member firms and that the prospect of a
pool encourages firms to enter and patent more.

Our data, however, challenge the expectation of regulators that pools
encourage innovation. Specifically, we find that pool members patent less
while the pool is active. This result may reflect a benefit of pooling: To
the extent that a pool reduces the risk of litigation it also eases the need
for strategic patents.

The overall speed of innovation in the sewing machine industry slowed
while the pool was active and only increased again after the pool dissolved.
While the pool was active, member firms failed to develop machines that
sewed at higher speeds, even though the demand for machine-sewn clothing,
including large numbers of Civil War uniforms, had seen a healthy increase.
Outside firms also failed to improve the performance of sewing machines
during the pool years.

Outside firms, in fact, did not benefit from the existence of a pool,
regardless of whether they licensed pool technologies or not. Historical
data on infringement suits suggest that the sewing machine pool increased
litigation risks for outside firms. By reducing expected profits, higher
litigation risks lowered incentives to invest in sewing machine
improvements. The threat of litigation also appears to have diverted the
research of outside firms toward inferior technologies that were not covered
by the pool. Outside firms, that committed their research to these inferior
technologies, faced higher likelihoods of exit (Lampe and Moser, 2008).
These results imply that patent pools may slow innovation if innovative
firms are excluded from the pool.

Lampe and Moser have produced an exemplary paper of careful research and
analysis in an important area. In doing so, they have raised serious questions
about patent public policy with regard to patent pools.

Posted by Patent Hawk at December 6, 2008 2:03 PM
| Antitrust

Comments

The patent pool agreement concerning aircraft in World War I was written by Benton Crisp, Curtiss's lawyer, and produced no US-built fighters actually USED in World War I. It did freeze out smaller competitors, though.

Was there any credible research that patent pools increased innovation? This seems like flogging a strawman.

Posted by: Lawrence B. Ebert at December 6, 2008 4:13 PM

Lawrence,

I'm not sure flogging a strawman is an on point comparsion.

Patent pools are receiving a fair amount of press and their claims should be reviewed. Historical findings are hardly strawmen.

1856-1877, World War I,...I'd be interested in more recent historical results.

Posted by: Noise above Law at December 7, 2008 8:42 AM

The World War I patent pool in aviation produced a lot of airplanes that weren't used in World War I, and profits for the pool members, at the expense of innovation. Content with the results of the pool, Curtiss went into the Florida real estate business. Separately, the Stanford economists seem to equate "number of patents" with innovation, which is hardly reasonable, especially when a pool exists. For a different problem with a different Stanford economist, see 8 JMRIPL 80 (2008).